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Guest Editorial Connecting the ERISA Fiduciary DotsBy Brooks Hamilton -- Brooks Hamilton & Associates. For over 25 years, Brooks Hamilton & Associates has created and managed custom retirement solutions for a select group of large, forward-thinking companies across the United States. Their mission is to help 401k plan participants retire in dignity, not despair. You may contact Brooks at 972.233.9168 or bhamilton@brookshamilton.com. In this article I want to examine whether or not just two dots can be connected from which a picture would emerge -- dots that are well known and in plain view.
Does connectivity exist between these two known and clearly visible dots? Stated in perhaps a more purposeful way, if most of the employees working for XYZ Corp. will retire in dignity, is it reasonable to conclude that XYZ's ERISA fiduciaries have probably met their fiduciary responsibility? Alternatively, if most employees working for XYZ Corp. will retire in despair, could one reasonably argue that XYZ's ERISA fiduciaries have probably failed to meet their fiduciary responsibilities? Short Detour: While the literal (and legal) meaning of the ERISA concepts involved with the phrase "meeting fiduciary responsibilities" is beyond the scope of this analysis, for these purposes it is intended to mean a standard of conduct whereby an ERISA fiduciary faithfully executes his/her duties and obligations concerning the plan consistent with the following two ERISA principles: Exclusive Benefit Rule
Prudent Investor Rule
Most gurus agree that fiduciaries are never relieved of a constant duty to (1) consider the prudence of the investment alternatives made available to participants under a plan, and (2) maintain oversight over such investment options [see CCH Pension plan Guide, ¶4485]. Return to Main Road: Is there a clear connection between the two dots of ERISA fiduciary Responsibilities and Retiring in Dignity? Or is there a less bright connection that only a few with eagle (and perhaps legal) eyes now see? More importantly, is there perhaps merely an obscure current connection lurking in legal shadows which the United States Supreme Court will, on a future day, clearly see and declare for posterity that it was always there? This raises another important question: Should an ERISA fiduciary "bet the plan sponsor's farm" (plus the fiduciary's farm as well, by the way) that there is not, and never will be, connectivity between these two simple dots? My position is that the stakes are too high to place that bet and that every ERISA fiduciary must discharge his/her duties in a manner most likely to afford their employees a reasonable opportunity to "Retire in Dignity." Assume XYZ Corp has 1,000 participants in their 401k plan. Now assume that the XYZ plan Investment Committee, aware of the fiduciary responsibilities imposed on them by ERISA, asks one of the plan's professional service providers whether most XYZ plan participants will retire in dignity, or in despair. And finally, assume that a detailed answer is requested for each plan participant. Assuming that the future will resemble the past, there is a logical way to "peer ahead" and measure the window of probability for each person. To illustrate the concept, we will take the case of two twin brothers, Joe and Charlie Doe. Joe is now age 35 and earns $35,000 annually, has $3,500 in his 401k plan account, contributes 3.5% of pay to the plan, directs that his account be conservatively invested (the annual investment return target is 5%), and plans to retire at 65. Charlie is also 35 and earns $35,000 annually, but has $35,000 in his plan account, contributes 8.5% of pay to the plan, directs that his account be invested in a market index fund (the annual investment return target is 9%), and plans to retire at 68. XYZ matches 50¢ on the dollar up to 6% of pay. For those who may wish to duplicate the following numbers, there are three additional assumptions to consider: future annual pay increases will average 4.5%; total annual plan fees and expenses are 200 basis points; and future inflation will average 3.5% annually.* Joe's annual pay will be $125,442 at age 65, and he will have a plan account balance of $172,375 (i.e., about 1.4 times his final annual pay). Charlie's pay will also be $125,442 at age 65, but as he will work another three years, his final pay at age 68 will be $143,150 (overall, Charlie will thus earn an additional $411,223 in the three additional years he works). When Charlie retires at age 68, he will have an account balance of $1,168,117 (i.e., about 8.2 times his final age 68 annual pay). Before Social Security is considered, Joe will retire on about 10% of his final annual age 65 pay whereas Charlie will retire on about 82% of his final annual age 68 pay. It is not "rocket science" to envision that Joe will retire into despair while Charlie will retire into dignity. How did this happen? Well, there are several important differences between Joe and Charlie, but the bottom line is simply that Charlie saved a little more, earned a little more, and worked a little longer. We shall assume three final things: (1) first, that Joe was alerted by his 401k retirement plan ERISA Fiduciaries to these basic facts and circumstances; (2) second, that the plan was "re-engineered" to effectively transition Joe's participation elections to mirror Charlie's decisions, by the use of intelligent "defaults" that do that job, unless Joe knowingly takes affirmative action to keep his retirement plan train running down a track leading to the final stop - a town named Despair, and (3) finally, all other participants in the plan are provided with the same information as Joe and Charlie. Conclusion: OK, first let's connect these two well known dots that are in plain view:
The argument is very basic: that is, if XYZ's ERISA fiduciaries successfully manage their responsibilities, most employees working for XYZ will retire in dignity - and visa versa. Not your problem? Are you willing to place that bet? Remember, fiduciaries that try and run from their perceived liabilities seem to become entangled in them, whereas fiduciaries that decide to turn and confront their responsibilities seem to extinguish them. If you want to sleep better at night, and avoid those fitful fiduciary nightmares, you might want to think about connecting these two dots by making sure you have helped plan participants know:
Further, think about putting your 401k plan on "auto-pilot" with critical benefit control levers set to a prudent "default" position, so that even an investment novice will be headed in the right direction, and be alright as s/he approaches and lands at the town of Dignity. * I will be happy to provide "work-papers" for requests sent to bhamilton@brookshamilton.com where "connect dots" is placed in the subject line. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. | |||||
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